adm3351 week1 notes

INTRODUCTION This introductory chapter will focus on the fundamental features of bond, the type of issuers, and risk faced by investors in fixed-income securities. Bond A bond is a debt instrument requiring the issuer to repay to the lender the amount borrowed plus interest over a specified period of time. A typical (plain vanilla) bond issued in the United States specifies A fixed date when the amount borrowed (the principal) is due, called the maturity date. The contractual amount of interest, which typically is paid every six months. Assuming that the issuer does not default or redeem the issue prior to the maturity date, an investor holding this bond until the maturity date is assured of a known cash flow pattern. SECTORS OF THE U.S. BOND MARKET The U.S. bond market is divided into six sectors U.S. Treasury sector, agency sector, municipal sector, corporate sector, asset-backed securities, and mortgage sector. The Treasury Sector The Treasury sector includes securities issued by the U.S. government. These securities include Treasury bills, notes, and bonds. This sector plays a key role in the valuation of securities and the determination of interest rates throughout the world. The Agency Sector The agency sector includes securities issued by federally related institutions and government-sponsored enterprises. The securities issued are not backed by any collateral and are referred to as agency debenture securities. The Municipal Sector The municipal sector is where state and local governments and their authorities raise funds. Bonds issued in this sector typically are exempt from federal income taxes. The Corporate Sector The corporate sector includes (i) securities issued by U.S. corporations and (ii) securities issued in the United States by foreign corporations. Issuers in the corporate sector issue bonds, medium-term notes, structured notes, and commercial paper. The corporate sector is divided into the investment grade and noninvestment grade